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Recession? Depression? What's the difference? (3014 hits)

After reading about the colapse of another Banking gaint... thought it might be useful to post this article: What's a recession? How do we know if we're in one?

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By Mike Moffatt, About.com
http://economics.about.com/cs/businesscycl...



There is an old joke among economists that states:
A recession is when your neighbor loses his job.

A depression is when you lose your job.

The difference between the two terms is not very well understood for one simple reason: There is not a universally agreed upon definition. If you ask 100 different economists to define the terms recession and depression, you would get at least 100 different answers. I will try to summarize both terms and explain the differences between them in a way that almost all economists could agree with.


Recession: The Newspaper Definition
The standard newspaper definition of a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters.
This definition is unpopular with most economists for two main reasons. First, this definition does not take into consideration changes in other variables. For example this definition ignores any changes in the unemployment rate or consumer confidence. Second, by using quarterly data this definition makes it difficult to pinpoint when a recession begins or ends. This means that a recession that lasts ten months or less may go undetected.


Recession: The BCDC Definition
The Business Cycle Dating Committee at the National Bureau of Economic Research (NBER) provides a better way to find out if there is a recession is taking place. This committee determines the amount of business activity in the economy by looking at things like employment, industrial production, real income and wholesale-retail sales. They define a recession as the time when business activity has reached its peak and starts to fall until the time when business activity bottoms out. When the business activity starts to rise again it is called an expansionary period. By this definition, the average recession lasts about a year.

Depression
Before the Great Depression of the 1930s any downturn in economic activity was referred to as a depression. The term recession was developed in this period to differentiate periods like the 1930s from smaller economic declines that occurred in 1910 and 1913. This leads to the simple definition of a depression as a recession that lasts longer and has a larger decline in business activity.

The Difference
So how can we tell the difference between a recession and a depression? A good rule of thumb for determining the difference between a recession and a depression is to look at the changes in GNP. A depression is any economic downturn where real GDP declines by more than 10 percent. A recession is an economic downturn that is less severe.

By this yardstick, the last depression in the United States was from May 1937 to June 1938, where real GDP declined by 18.2 percent. If we use this method then the Great Depression of the 1930s can be seen as two separate events: an incredibly severe depression lasting from August 1929 to March 1933 where real GDP declined by almost 33 percent, a period of recovery, then another less severe depression of 1937-38. The United States hasn’t had anything even close to a depression in the post-war period. The worst recession in the last 60 years was from November 1973 to March 1975, where real GDP fell by 4.9 percent. Countries such as Finland and Indonesia have suffered depressions in recent memory using this definition.

Now you should be able to determine the difference between a recession and a depression without resorting to the poor humor of the dismal scientists.
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Prepare for our economy to get a lot worse, before it gets better.

Are you all set to ride it out?

Do you have mulitple streams of income?

How do your residuals look...are you diverified?


Posted By: Dr. Ahmad Glover
Monday, September 15th 2008 at 1:09PM
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Uhhh-O! I'm SOL anyway you look at it.

BUT I do have plenty of canned goods and I'm into shopping at the farmer's market.

BUT I need to know, will the size of portions go back to normal when the expansionary periods arrives?

If these cans of tuna gt annnnnny smalllller, I'm done!:)-

Seriously, thanks for the clarification and the prognosis. I must share this info, too.
Monday, September 15th 2008 at 2:51PM
agnes levine
Updated...
Monday, September 15th 2008 at 3:11PM
Dr. Ahmad Glover
MJ,

ha,ha,ha...
Monday, September 15th 2008 at 6:19PM
Dr. Ahmad Glover
Ready or not, it will come! I probably could stand to lose a few pounds anyway..... Smiles
Monday, September 15th 2008 at 6:25PM
MIISRAEL Bride
Miisrael,

At $6 per gallon, stocks bottomed out, and no equity in our homes...we will all lose a few ;~{o)
Monday, September 15th 2008 at 6:28PM
Dr. Ahmad Glover
MJ you always make me laugh! It does good like a medicine! EP, rich and poor will both be effected, just in different ways. My oppinion is that the poor may just surprize us all. The fact that they have been doing without..or more accurately... with less than most, proves that they are resillient and well prepared to do whatever it takes to make things work. I personnally am more fearful of an EMP than a recession or depression. The poor may one day teach us all a valuable lesson, one that most "rich" are unaware of.
"Feed a man a fish, you feed him for a day. Teach a man to fish, and you feed him for the rest of his life." (author unknown)
Not only that, but once he has been taught, he now possesses the means to teach others, so they don't eat up all he's caught. GB!
Tuesday, September 16th 2008 at 10:48AM
Lesley Knight
I will have to agree with Lesley. Those of us who are stressing out about the recession may want to take a look at what we consider recession. Is it because we are living above our means, or that since we are accomplishing big pay checks we go out and buy things we do not necessarily need. People who are just getting by are the ones we should be learning from, they only purchase what is needed.
If we claim that we are prepared for the hard times, recession or depression should no longer phase you.
Wednesday, September 17th 2008 at 4:58PM
Cheryl Hendrix
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